UK: Summer Budget 2015 Commentary

Last Updated: 14 July 2015
Article by Smith & Williamson

1 Overview

With a careful blend of positive messages for individuals and corporates, laced with plenty of less welcome rules and HMRC powers, the Chancellor of the Exchequer delivered a balanced Budget to a lively House of Commons.

He has sent a clear message on the importance of good compliance and clear transparency, announcing further resources to help enhance exchequer receipts by attacking tax evasion, avoidance and other such practices.

The heat has been turned up on longer-term UK-resident non-doms, some of whom are likely to be burned by a tightening of the regime. But for business the Chancellor has announced a pledge to further decrease the main rate of corporation tax, increase the proposed level of annual investment allowance and increase the enterprise allowance against employers' national insurance.

The welcome increase in rent-a-room allowance was, however, overshadowed by the clouds gathering over buy-to-let landlords who will face an increasingly less generous regime over the coming years.

2 Personal and Trust taxes

2.1 Personal tax allowances and thresholds

The  Chancellor has set out the  personal allowance  and higher rate threshold for 2016/17 and 2017/18.

As part of the pre-election commitment to a £12,500 personal allowance by the end of this Parliament, the Government will increase the income tax personal allowance:

  • from £10,600 in 2015/16
  • to £11,000 in 2016/17
  • and £11,200 in 2017/18.

Once the £12,500 level is reached, the personal allowance will subsequently increase in line with the national minimum wage (NMW) to ensure that those working 30 hours a week on the NMW are not subject to income tax.

On a similar theme, and as part of its commitment to a £50,000 higher rate threshold, also by the end of this Parliament, the existing threshold at which the 40% income tax rate starts will increase:

  • from £42,385 in 2015/16
  • to £43,000 in 2016/17
  • and to £43,600 in 2017/18.

The NIC upper earnings limit will also increase to remain aligned with the higher rate threshold.


Although the increases are welcome news, not all taxpayers benefit.  Those with incomes over £100,000 continue to see their personal allowance abated on a £1 for £2 basis. Those on low incomes already taken out of tax will not be affected.

2.2 Changes to taxation of non-UK domiciled individuals

The  Government has announced wide-reaching changes to the rules governing the tax treatment of non-UK domiciled individuals.

Under long-standing rules, non-UK domiciled, but UK-resident, individuals may elect to be taxed in the UK only on UK-source income and gains, and non-UK source income and gains to the extent these are remitted to the UK.

Non-UK domiciled individuals are also currently not subject to UK inheritance tax (IHT) on tax assets outside the UK until they have been resident in the UK for 17 of the past 20 years.

The Government has announced that, from 6 April 2017, those individuals who have been resident in the UK for more than 15 of the past 20 tax years will be deemed to be UK-domiciled for all UK tax purposes.

Once deemed UK-domiciled, an individual will be taxed on his worldwide income and gains, while UK resident, with his worldwide estate subject to UK IHT.

The new rules will be effective from 6 April 2017 irrespective of when the individual arrived in the UK. There will be no special grandfathering rules for those already in the UK.

For those individuals resident in the UK for 15 or fewer years, the remittance basis charges will remain unchanged.

The proposals include a number of associated changes and the Government plans to launch a consultation on the 'best way to deliver these reforms', followed by a second consultation on the draft legislation to be included in Finance Bill 2016.

At the same time, it was announced that, following consultation, the proposed three- year minimum claim period for the remittance basis will not be brought in.


Following the announcement of the planned abolition of non-UK domiciled status in the 2015 Labour Party manifesto and the publicity this attracted, some form of reform to the regime for non-UK domiciled individuals was inevitable, whichever party formed the next government.

That these changes may not have been envisaged by the current Government until recently, is evidenced by the fact that the £90,000 remittance basis charge for those resident in the UK for 17 of the past 20 years, introduced in March 2015 Budget, will now only have effect for the tax years 2015/16 and 2016/17, before it becomes obsolete. While the headline announcement of the reforms appears straightforward, they will involve a large number of associated and complicated technical changes, the entire details of which are yet to emerge.

However, some important points should be noted

The reforms do not abolish non-UK domiciled status, but merely bring in a new deemed UK-domiciled status, which can be lost once an individual has been non-UK resident for at least five years.

As a result, the children of a long-term UK resident non-UK domiciled father will still inherit this non-UK domiciled status, subject to the new deeming rules.

Of considerable interest will be the impact of the changes on the treatment of non-UK resident trusts established by non-UK domiciliaries.  As part of the technical documents accompanying the announcement, the Government has confirmed that assets placed into trust while an individual is non-UK domiciled for tax purposes will remain excluded from UK IHT.  While income received from such a trust after the individual has become deemed UK domiciled would be subject to UK tax on an arising basis, income and gains kept within the trust will remain outside the scope of UK income and capital gains tax.

Consequently, those individuals who are not UK domiciled and who are not already caught by the existing IHT deemed domicile rules may wish to review their position urgently with a view, potentially, to establishing new offshore arrangements before the reforms come into force.

2.3 Eligibility of non-domicile status for UK-born individuals

Rules are  to be introduced to restrict the eligibility to non-domicile  status for individuals born in the UK, with a UK domicile  of origin, who later return to the  UK with an acquired non-UK domicile  of choice.

Individuals born in the UK but who subsequently leave the UK and obtain a non-UK domicile of choice will be treated as if UK domiciled for tax purposes immediately following any resumption of UK residence status.

The new rules will be effective from 6 April 2017.

It is likely that these proposed changes will form part of the wider consultation on the tax treatment of non-UK domiciled individuals.


The introduction of these changes can be seen to follow recent high-profile cases and reforms in this vein were widely expected.

The changes do, however, leave little scope for pre-emptive action.  In particular, an important point to note is that any trusts established by such an individual while they are abroad will not benefit from the excluded property trust regime after they have regained UK-domiciled status.

As such, it is unclear at present what action these individuals will be able to take to mitigate the impact of these changes.

2.4 UK residential properties - inheritance tax for non-UK doms

The  Government has announced that from 6 April 2017 all UK residential property held directly or indirectly by non-UK domiciled individuals will be brought within the charge  to UK IHT.

Currently, where a non-UK domiciled individual holds UK property personally, this is subject to UK IHT, as the property is situated in the UK. If, however, the property is held by a non-UK company, the shares in this company will not be situated in the UK for IHT purposes, so the underlying property is effectively removed from UK IHT where the ultimate owner is not deemed UK domiciled for IHT purposes; that is, they have been resident in the UK for fewer than 17 of the past 20 tax years.

A common addition to this structure is to place a non-UK trust above the non-UK company while the ultimate owner is not deemed UK domiciled. This will create an 'excluded property' trust, which will remain outside the scope of UK IHT regardless of whether or not the non-UK domiciled individual becomes deemed UK domiciled for IHT purposes.

The proposed reforms will bring all UK residential properties held in such a way within the scope of UK IHT from 6 April 2017.

The reforms will apply to all UK residential properties, regardless of whether they are let commercially, but will not impact upon diversely-held non-UK companies, so will not catch structures such as non-UK investment trusts.

A consultation on the reforms will be published in order to assess how best to bring them into effect and a further consultation will be published on the draft legislation, which is intended to form part of Finance Bill 2017.


These reforms can be seen as the final step in bringing UK residential property held by non- UK residents fully within the scope of UK tax, following the introduction of the annual tax on enveloped dwellings (ATED) and the charge to CGT for UK residential property held by non-UK residents.

It is interesting to note, however, that the proposed reforms cover all residential property (apart from those owned by diversely-held non-UK companies), regardless of how it is occupied, unlike the ATED rules, which specifically exempt commercially let properties. Individuals who have not already unwound their non-UK property-owning structures (known as 'de-enveloping') will now need to consider whether the removal of the IHT benefits make these structures uneconomic. The process of de-enveloping is not without complication and cost and it will be necessary to consider each case on its merits.

2.5 Inheritance tax and the main residence nil-rate band

From 6 April 2017, for taxpayers who wish to pass their main residence to their direct descendants on death, a new main residence nil-rate  band will be introduced, in addition to the  usual nil-rate  band.

The new main residence nil-rate band will start of at £100,000 in 2017/18 and increase by £25,000 annual through to 2020/21. The annual amounts will be:

  • £100,000 in 2017/18
  • £125,000 in 2018/19,
  • £150,000 in 2019/20, and
  • £175,000 in 2020/21.

Thereafter, it will increase in line with the consumer price index (CPI). The existing nil rate band itself will be frozen at £325,000 until the end of 2020-21.

The relief can be used against only one main residence that the deceased lived in at some point. Where the relief is not used in full, it may be transferred in the same way as the usual nil rate band to a surviving spouse.

The main residence nil-rate band will be available in full against estates worth in total under £2 million, or subject to withdrawal at a rate of £1 for every £2 of estate over the £2 million threshold.

The Government will also be consulting from September 2015 on the practical application of the availability of the relief against cash or other assets that are passed to direct descendants on death, which equate to the value of a taxpayer's home cashed in where a taxpayer choses to downsize or ceases to own a home on or after 8 July 2015.


This relief from IHT for the family home formed part of the Conservative party manifesto in the run up to the 2015 election.  This announcement is therefore not unexpected although is more complicated than a simple increase in the nil-rate band.

Given the sharp increase in house prices and the freezing of the IHT nil-rate band in recent years and in the future, an additional relief will be welcomed by families who wish to pass their home to their children or grandchildren.

The announcement that the relief will not be restricted for those families wishing to downsize is also welcomed, and hopefully prevents a perverse incentive not to downsize as their needs reduce. We look forward to examining the detail of how the relief will be applied for downsizers.

2.6Other announcements

2.6.1  Extending averaging periods for farmers

The announcement made in the March Budget that the period over which farmers will be able to average their profits for income tax purposes is to increase from 2 years to 5 years from April 2016 has been confirmed.

2.6.2  Payments from sporting testimonials

Following a call for evidence in 2014, the Government has announced it will consult on changes to the existing tax treatment of payments from sporting testimonials.

2.6.3  2015 Anniversary Games - Income tax exemption for non-resident Participants

The previous commitment to exempt from income tax non-residents participating in the 2015 Anniversary Games, taking place between 24 and 26 July 2015, is to be implemented.

To view the full article please click here.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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